Daily analysis 07.01.2015

A significant risk aversion increase on global markets – equities slide, lower government bonds yields, oil slump and yen rebound. Record low inflation in the euro zone, but the “core” ticked up. “Minutes” should be dollar bullish. The zloty remains fairly stable to the euro but losing further to the US dollar.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 14.15 CET: ADP from the US (survey: 225k).
• 20.00 CET: “Minutes” from the December Federal Reserve meeting.

A significant risk aversion hike

In the recent days there have been some factors which increased the concerns about global economy. Greek issues, despite a relative small real impact, built up the uncertainty regarding the whole euro zone. Worse condition in Europe is a threat for many economies around the world. It is seen mostly on assets which have been under presser for months – euro dipped further and the oil slumped 10% since the beginning of the year.

A nervous atmosphere was also transmitted across the pond. Falling crude is more often interpreted as a sing of weakening global economy. Some turmoil was also injected by the US ISM readings. Both manufacturing and services indexes dropped more than estimated (55.5 vs 57.5) and 56.2 vs 58) respectively. As a result equities began the year with some correction and we are witnessing capital transfer to bods. Yields on 10-year treasuries dropped ended the session yesterday close to 1.5 year lows.

In moments of elevated market risk Japanese currency often rises. It hard to tell how long the yen remains “safe haven” but the JPY appreciation against the USD also increases the risk aversion.

Euro zone inflation

Investors from the beginning of the week had been speculating about the euro zone inflation and how it may affect the ECB decision scheduled on January 22nd. The prices dropped more than expected (minus 0.1%) to minus 0.2% y/y. The highest impact on the HICP came from energy cost slump. Without the petrol and food the inflation rose 0.8% y/y in December – 0.1 percentage point more than in November.

We may assume that the current data is mixed for the ECB. The oil slump effect does not translate to the higher deflation risk in the euro area, but the negative prices threat cannot be excluded especially if the Brent remains around the current levels. Draghi, probably, would like to exploit the “headline” reading to push the full-blown QE forward but until the “core” inflation remains around current level the operation may be smaller than currently anticipated.

Overall the EUR/USD market should remain under a significant pressure and there are not enough arguments currently to generate a stronger correction. Consequently, the new lows on the most heavily traded currency pair are more probable than a visible rebound.

Minutes

Investors may focus a bit more on today's minutes. The discussion during December's Federal Reserve meeting should give some hints how the Fed sees “patient” or whether there are real chances that the FOMC can raise interest rates before mid 2015.

However, it is also possible that in “minutes” we get many conflicting ideas, what can confirm the fact that both hawks and outspoken dove rejected the most statement. Additionally, a short-term impact may be disturbed by the current market situation. Investors may conclude that the situation changed significantly in since mid December and therefore the impact can be muted.

Foreign markets in few sentences

A significant risk aversion at the beginning of the year intensified some trends (crude slump, weaker euro) and provoked correction on others (yen, US stock market). However, with high level of probability scheduled at the end of January the situation should return to what we observed in second part of 2014. Meanwhile, in the short-term the incoming hours should be negative for the euro and a test of 1.1800 may be possible especially if we get a solid ADP report (over 250k).

The zloty under global impact. Investors starting to price in the interest rate cut

The Polish currency remains under pressure. The EUR/USD slide and global equity sell-off are negative signals for the zloty, especially to the dollar. The US currency is the strongest to the PLN since almost 6 years and is approaching 3.65 level.

The situation is getting more interesting on the debt market where 10-year yields are dropping to the record low levels. It translates also to the money market where FRA contracts are pricing in 18 bps rate cut on February MPC meeting and 30 bps till April. On one hand it may be negative signal for the zloty but on the other if it turns out that Belka and his colleagues are not really eager to more dovish approach in January it will be a good argument to generate a rebound on PLN at least to the euro and franc.

WIBOR 3M and FRA 3x6

Source: Bloomberg. The white line shows WIBOR. The orange line shows FRA 3x6. The yellow line (bottom chart) shows the spread between FRA and WIBOR. The bigger the difference between WIBOR and FRA, the bigger the scale and the probability of the interest rates cut in the quarter to come are.

In the following hours the EUR/PLN should remain around 4.30-4.32 and CHF/PLN will probably not exceed 3.60. The strongest probability for further appreciation is on the dollar with the target at 3.65.

Expected levels of PLN according to the EUR/USD rate:

Expected GBP/PLN levels according to the GBP/PLN rate: